How a Sleeping Drug Company Increased Prices 300% Without Anyone Noticing

Jazz Pharmaceuticals (JAZZ) has pushed up the price of its narcolepsy drug Xyrem fourfold since 2006, and it's a good example of how prescription costs in the U.S. are out of control. Xyrem now costs as much as $35,000 per year of treatment, and the company says it could double the price again without anyone noticing.

In fact, the only reason Jazz survives as a business is because of the naked price increases it has managed to extract from reimbursers -- namely health plans and the government -- none of whom have offered any pushback.

To rescue itself, Jazz began upping the price of Xyrem. The price hikes worked. Jazz's Q3 2010 "set a new record," CEO Bruce Cozadd told Wall Street in a conference call in which he also said 2010 was "a pivotal year." In a recent note to investors from Jefferies & Co. analyst Corey Davis, a chart of Xyrem's spiraling price was labeled "To the Moon, Alice!"

Jazz's business consists almost entirely of Xyrem. Jazz had Q3 revenues of $44 million, with $37 million of that coming from a 49 percent increase in Xyrem sales. Jazz president Bob Myers said he's not done yet. Another 22 percent price increase was scheduled for Xyrem on Nov. 1, he said told the conference call:

Even at our highest dose ... after the price increase the annual cost for 12 prescriptions per month is still only $35,000 per year. So yes there is a price ceiling that we want to stay below to not raise the scrutiny of payors or plans. But quite frankly we're nowhere near that ceiling right now. We could more than double that current price and still be below that ceiling. We do want to avoid big jumps in price.